Hello, and welcome to the Download. I'm your host, Dave Richardson, and it is Stu’s day on a Wednesday. We've gotten a little consistent there for a while, getting together on the actual Stu’s day. But once again, my fault, Stu. I'm sorry.

No problem at all, Dave.

So we're going to be doing a Swednesday potpourri today. We've got several subjects we're going to fire your way. You have potpourri around the house, Stu? I imagine you've got a good smelling house.

To tell you the truth, I'm not a big potpourri guy, Dave. I do like fresh scents, take lemon or something like that. But the melange of scents is not my cup of tea.

You like it to be more distinctive and fresh. For me, it's bad for my asthma. So we don't do the scents around the house. But do you do the scenting around the house, or you keep it a little bit more sterile?

I would say, in the spectrum, sterile to lemon. That's the favorite.

Okay, so you use same thing on the floors as you use on the windows?

Yeah, you got it.

There we go. Okay. So speaking of windows, the bank of Canada stared forward into the window, looking out at inflation and economic growth and the job market. And what did they do, Stu? Did they raise interest rates?

No, Dave. They held tight. Was that climactic enough, Dave?

It was a pretty exciting announcement. Coming in, there was a 100% chance that they were not going to raise rates. So they followed through. I guess it's not that shocking. And so, you probably did get about as much excitement for the listeners out of the announcement as possible there. It was a good pause.

I think the bank has looked at a lot of things that many economists have highlighted around the lagging impact of monetary policy, with inflation coming down. In Canada, there is a portion of the basket of inflation that is mortgage payments, which gets a lot of debate. On the one hand, people say, if mortgage payments weren't higher, then people would have that money, so they'd be spending it, which might be inflationary. On the other hand, people say that's a part of inflation that's within the bank's control. And then there's some other things in core that are still a little bit hot. It's coming in the right direction, and I think their action today is to say the economy does appear to be slowing and we can remain vigilant with our communication. And the threat always sits above the shoulder while they're trying to tame inflation, but also acknowledge that they have put a lot in the pipeline and things appear to be slowing a little bit.

Yeah. And the yield curve has flattened out. And as we've talked about with a number of guests— I think we've touched on it, too, Stu— the longer-term rates have come up quite a bit just over the last two and a half months, and that's doing a lot of work for bank of Canada and the Federal Reserve in the US. You can't ignore that because, as much as the bank rate is important for a lot of reasons, those longer-term yields really set the tone in terms in the commercial area and then also for government debt as well.

Yeah, 100%, and there's a lot of long-term charts as well that the slope of the yield curve, which started the year very negative, and now is not too bad down to 10 or 15 basis points. But it's a weird way to say not too bad, because often when the yield curve goes back to a positive slope is when the economy starts to struggle. So it's the real sign that the monetary conditions have kicked in, and that's when you really start to see the slowdown. So we started the year with the yield curve sloped at negative 100 basis points, and today we're at 20 basis points or whatever in the United States. So that's another thing central banks, I think, are wary of, is the speed of losing the slope of the yield curve.

Does that hurt my dividend stocks, Stu? Because all of a sudden, right across, whether I want to go short term, midterm, long term, I can get 5%. And if I go out into high quality corporate debt, I can probably get 6%. I can get a GIC for 6%. So what does it do to my dividend stocks?

It does weigh on them in the short term, because in that period of time, if you have a bit more of an economically sensitive dividend stock, then people worry about the pace of dividend growth afterwards. And if you have a dividend stock that's not as economically sensitive, you worry about, not about the dividend itself, but these balance sheets need to be refinanced at higher levels. So the two camps of dividend stocks in the short term wear some concern over the higher 3- to 5-year rate, and then domestically. Anyways, when you buy, not only are these interest rates attractive, whether it's a GIC or a bond, but when you buy a bond, it's often what they call a discount bond. So the return back to par comes to you for capital gains. So the yields you see can be even better on a tax-adjusted basis, which also can be a challenge to dividend stocks. I think what we do when we look inside the overall dividend universe is sit there and say, what is the intermediate-term growth potential for the dividends? And we try and build a portfolio of stocks that might be long-term dividend growth between 4 and 7% or something like that. And during periods of time when people think it might be at the lower end, the yield on the stock that people demand often rises. But it has pressured some stocks in the near term. For portfolio managers, it’s a great time to high grade. You do all sorts of things on an ongoing basis, but opportunities have presented themselves. And there's also some tax loss selling as well in the market.

Well, that's what we wanted to get into. You're at that time of year where you are looking at what's been happening this year. There are some opportunities to, as you say, clean some things up within a portfolio. Taxes are obviously important. You just highlighted that on buying bonds below par and the capital gain that you generate if you hold it to maturity, which is another topic we'll take for one of our fixed-income experts. But are you doing a lot of tax management activities this time of year or is your process a little bit more consistent through the year and then you see there's a lot of other portfolio managers who do tend to leave it to the end of the year? How does that all play out in the industry?

Well, I think we try and do it on a consistent basis. The ideal situation is if you have a stock at a loss and you can find a business that does almost an identical thing, and you can sell one stock and buy the other, and the portfolio is basically in the same shape, and you've put that capital loss onto the book, so to speak, which either helps you eliminate a capital gain you may have taken or can be used on a capital gain in the future. So we tend to do it on an ongoing basis. But this year, a couple of things accentuate that. The first is, in certain stocks, if you've sold anything this year, you may have realized a fairly large capital gain; if you sold one of the Magnificent Seven, if you changed your portfolio allocations. Or if you've owned stocks for a long period of time, and you make an adjustment in your portfolio, maybe your cost base was quite low. So the incidence of realizing capital gains is higher because of those factors. So you want to be extra vigilant on stocks that you may have at a loss in your portfolio and you can say, well, I can realize that loss without really impacting the portfolio. Two things that have accentuated that here is, to your earlier point around the move in interest rates, that has pressured some stocks that have been on the defensive side that haven't traditionally been pressured. And the second thing is, in this kind of lower environment of liquidity, just as people are finding fixed income and GICs attractive, there's less money in the equity market floating around to sop up some of these trading situations. So you have seen some larger blocks of stock move in that fashion that may persist for another four to six weeks as we get through this process. Ideally, the reason we like to do it on an ongoing basis is because you want to be in a position to try and take advantage of some of that stuff. And there has been a lot of studies done around some stocks that are quite poor performers as they get to the end of November. They often have a rally starting mid-December into the new year as this pressure of selling alleviates itself. So the point there is, if you're going to sell something, you want to do it for this tax year.

Exactly. Are you able to see any difference between what you might call your average retail investor managing their own portfolio, buying individual stocks, versus fund managers and professional investors and how they manage this tax loss selling period?

Well, I think the most important thing is to have a system in place where you can review your cost basis at all times. Whether or not you have that system or not, you still tend to get more activity at the end of the year. Whether or not you're a private client or an institution. Institutions often move on at the end of the year. They've owned something and they just want to start fresh. So it's all sorts of investors that engage in this activity into the end of the year. And we've seen large blocks, we've seen small blocks, we've seen it from all investors. I think the important thing is to try and always leave the portfolio positioned for its best, coming out the other side. So if you had one stock and you could buy an ETF that had a very high correlation. So for 30 days the portfolio is going to be the same. You got the loss in, or you have two businesses that have a high correlation. In some instances you have a business that you're just frustrated and hasn't panned out and you move on to something else that can better the portfolio. Everyone's human. We all have behavioral biases, and sometimes taxes can be that final kick that gets you off the can to say, I should just get rid of this thing.

Very interesting. What about the idea— so the flip side of that—, what's referred to as window dressing? So what would come out publicly around the holdings of a fund or what they hold at a particular date? So say December 31, 2023. I imagine, just knowing you, that that's not something that you're too big on. That somebody opens up your portfolio and sees that you own stock X or one of the Magnificent Seven, in this case. But that is a true concept that does happen across portfolio managers, right?

It does. It's like you say, maybe you want to show what you've owned. Or the reverse happens on the tax side: I've got big gains in these things, I'm not going to touch them until we get to 2024. So the combination of those two things about wanting to maybe show ownership in stocks that have worked— quote unquote— coupled with an absence of selling around them, those stocks can often do quite well into your end for both those reasons.

Okay, well, let's move off the tax loss and window dressing and let's go to the next topic, which is earnings so far. As I'm watching the flow of earnings, the different reports, it seems pretty mixed, which I think is what we were expecting. That things have been okay up until now, but then any firms that are looking forward into 2024 are a little bit more concerned about where things are going to go. Is that what you're seeing in general, or are you pretty comfortable with what you've seen thus far?

A bit of both. I think we were somewhat braced for a more sanguine commentary. It's a great use of the word sanguine, in this environment. Because it’s not quite like the slowdowns that are caused by a real credit pinch. We're not in that type of a slowdown. Pent-up demand is not there. There's just a bit of a malaise that's finding its way through a variety of businesses. So if you have a quarter that's good, people say, well, it was okay, but it's not likely to persist. And some management teams are coming out and saying, look, we're seeing some softness in different parts of our business as we move forward. And it's always relative to what's expected. So when you have a market that, in August, was not priced for any type of a slowdown, and now is priced for some degree of slowdown, but maybe not a full degree, that's why you're still getting this volatility coming off the back of it. And you're getting an ongoing narrowing. So things around internet advertising or some cloud-oriented businesses, they've been strong, but you're still getting margins coming down in some places, revenues pressured in other places. So that's just working its way through the stock market and that's pretty much normal course for where we're at right now.

So as you look forward into next year, are you feeling optimistic about things or are you still pretty neutral and really picking your spots?

Well, as we've talked, there's always something to do. There are certainly some businesses out there where their share prices are trading at levels where I think we're going to make pretty good money over time. The question— and much of what we're buying— is when, not if, in our minds. That's not a bad spot to be in when you're an investor. But we also know that there's still this recognition that revenue lines are tougher. Costs— whether it's interest costs or wages or what have you—, is a bit of a pressure. Again, optimistically, sanguine— just to go back to that word. It's hard not to be a long-term investor and not be optimistic that things will sort themselves out. But when it comes to buying something, you're also not being flippant. You're trying to really say, this might get a little bit worse. I will continue to buy it through that period of time because I'm going to make money on the other side of the valley here.

Wow. Again, I'm just always amazed if I'm out talking to friends about what they might be doing— friends that buy and sell stocks all the time, and that's how they manage their portfolio and they enjoy it and they're into it. They're watching a lot of details. But there's just absolutely no way that they're spending as much time and paying as much attention and managing as many different things at a highly detailed level as you and your team are. It's just really not possible.

Well, thanks. It's mostly the team.

I know that. That's why I threw them in there, Stu.

But taking a financial model, understanding how the revenue might change, how the cost could change, how the capital intensity changes. I was looking at a large semiconductor business this morning that's going through a significant period of investment and you can begin to see how much free cash flow. It may not emerge until 2025 or 2026. Which is three years away. It sounds like a long time, but you begin to see, well, I don't know exactly what happens in the next twelve months, but as we get to that 2026 frame, the stock could be up 40 or 50%. So that, in a token, gets you on the bus. But that's the type of stuff that we're trying to do, is to say if we have the benefit of time, we have a business with a good balance sheet and we think we're going to make some money down the road.

So an omnipresent, but sanguine Stu Kedwell, with lots of advice on all the different areas that he's looking at every day, managing portfolios. Stu, as always, great to catch up with you. You flexed your vocabulary a little bit today. That's impressive too.

Well, there you go, Dave. I'm always working on that, too.

I know. You look smarter every time we do one of these things. I guess it's part of that wisdom acquired through age.

Yeah, something like that. Thanks very much, Dave.

Okay, see you next week, Stu.